Economists Say Recession Risk Is Climbing

By

Phil Izzo

Updated Dec. 11, 2007 11:59 p.m. ET

The risk of a U.S. recession is rising, and the Federal Reserve should do something about it, according to economists in the latest WSJ.com survey.

Fed officials have "to move to show their willingness to both avert risk of recession and stabilize the financial crisis," said
Diane Swonk
of Mesirow Financial. She said Fed Chairman Ben Bernanke's emphasis on consensus has proved to be the central bank's "weak spot in crisis mode. Now they need to show conviction instead of consensus."

Fifty of the 52 economists surveyed expect the Federal Open Market Committee to trim its target today for the federal-funds rate, the rate charged on overnight loans between banks. Only two see the Fed holding the rate steady at 4.5%.

Some 61% say a quarter-percentage-point cut would be right; 27% say the Fed should cut rates by a half-point. Only 12% say the Fed should stand pat.

The economists, on average, now put the chances of a recession at 38%, the highest in more than three years, and up from 33.5% in November. They also reduced forecasts for U.S. economic growth across the board. They expect the nation's gross domestic product to grow at an annualized rate of 0.9% this quarter, down from 1.6% in the previous survey, with six economists expecting either a negative or a flat reading. Three economists project an economic contraction in the first quarter, with the average growth forecast at 1.5%, down from 1.9% in November.

About the Survey

The Wall Street Journal surveys a group of 54 economists throughout the year. Broad surveys on more than 10 major economic indicators are conducted monthly. For prior installments of the surveys, see: WSJ.com/Economists.

The Fed, in weighing its move, should consider market expectations, says
Stephen Stanley
at RBS Greenwich Capital. The December federal-funds futures contract remained fully priced for a quarter-percentage-point cut, and showed about 40% odds for a half-percentage point cut. "They've already signaled a cut," he said. "They can't not ease."

By nearly 4 to 1, the economists said that the Fed, in the statement it is expected to issue today, should say that slow growth represents a greater risk than inflation. Such a statement would suggest further cuts may be on the way. The economists, on average, expect at least one quarter-point cut next year.

Global economics editor David Wessel discusses results of the economists survey, showing an increasingly gloomy outlook and the odds of recession at nearly 4 in 10.

Kathleen Camilli
of Camilli Economics, the most pessimistic forecaster in the survey, sees "the internal dynamics of the U.S. economy deteriorating into recession" this quarter. "Growth will be negative this quarter, nonfarm payrolls will be revised down, and from what I can see, personal-consumption expenditures are rapidly slowing," she said. "All U.S. consumers, wealthy and middle-class, pull back their spending when their housing investments stop appreciating and start deteriorating in value. This is already under way, and has been exacerbated further by high oil prices."

Ram Bhagavatula
of Combinatorics Capital, echoing a common theme, said, "The economy is adjusting slowly to the housing bust."

The average forecast for housing starts next year was revised lower for the fifth consecutive month. A projected decline in 2008 home prices, as measured by the Office of Federal Housing Enterprise Oversight index, steepened to a 3.5% drop from the 2.6% drop forecast in November.

Still, the economists were lukewarm on the government's attempts to stem the subprime-mortgage problem. Only 41% said the pending Treasury-backed proposal to have lenders and servicers agree not to reset rates on certain mortgages was a welcome attempt to spare homeowners -- and the economy -- a wave of defaults and foreclosures.

Among other findings of the survey:

ENLARGE

Asked which presidential candidate would be best for the economy, only half responded but most threw their support behind Republicans. Thirty-five percent said Rudolph Giuliani would be best, while 19% chose John McCain and 15% picked Mitt Romney. Hillary Clinton got the support of 8%, while John Edwards was the only other Democrat to register with 4% of the vote. Ron Paul, Michael Bloomberg and Alan Greenspan each got a write-in vote, despite the fact that only one of them is running.

Most economists say the hope Europe and Asia would pick up the slack when U.S. growth faltered remains alive, with 43% firmly saying the idea is still intact and 38% saying it is too soon too tell. Just 19% said the hope is totally dead.

Expectations for growth in nonfarm payrolls over the next month hit their lowest level since September when a dismal figure was released by the Labor Department and subsequently revised higher in October. The economy is expected to add just 83,958 jobs a month over the next year. Meanwhile, estimates for the unemployment rate in 2008 rose over 5%.

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